A 20-Year
Case Study:
The Endowment Model


We talk a lot about the benefits of making small commitments in non-traditional asset classes, often called alternative investments. Since many investors mainly have experience investing in stocks and bonds, the idea of alternative investments may be quite new. Luckily, there is a group of investors who have been using alternatives actively for more than three decades. We can use their experience as a case study.

Some of the most sophisticated academic endowment funds have been using an investment approach (coined ‘the Endowment Model’) for over 20 years. It includes the active use of alternative investments.

A bit of background:

The term, The Endowment Model, can traced back to the early 1970s, and was later institutionalized in Pioneering Portfolio Management, a book published in 1999 by David Swenson, Chief Investment Officer of Yale University. The Endowment Model describes the following investment strategies:

  • Take advantage of the long time horizon that Endowments (and wealthy individuals) have—since the bulk of the assets will be passed to the next generation.
  • Monitor, but do not necessarily react, to short-term events and trends in the market.
  • Seek the higher returns available from equities, which are more volatile in the short run but outperform over time.
  • Invest a portion of the portfolio in alternative investments. While alternative investments are often less liquid, long term investors benefit from their positive returns over time and the important portfolio diversification they provide.
How Have They Done?

Over the past 20 years, through June 2013, the 20 largest endowments in the US outperformed a global 60/40 mix by 3.9% annually. (For a $1 million investment, this represented over $1.1 million in additional gains over a global 60/40 mix during that time period.) They didn’t outperform every year, or even every five-year period, and future returns will certainly be different, but for investors with a portion of their wealth focused on providing for the next generation, this history is instructive. More importantly, these endowments experienced an increase in their Sharpe Ratio—a technical way of saying their portfolios were more efficient and took less risk to achieve those extra returns.

How is it relevant to you? After all, you may not have billions of dollars to invest.

Surprisingly, the investment objectives of endowments mirror those of wealthy individuals. So a strategy that has worked for endowments holds important lessons for individual investors as well.

Like many of us:

  • Endowments can’t afford to lose significant principal.
  • Endowments require steady and growing withdrawals to meet expenses.
  • Endowments seek to preserve their principal to pass on to the next generation.
Our expertise is tailoring this approach for individual investors.

We will work with you to:

  • Make sure you understand these complex securities. Remember, never invest in something you don’t understand.
  • Interpret the tax issues of the different securities and make sure the location of each investment is appropriate (in your personal taxable assets, retirement accounts or trusts.)
  • Ensure that the non-traditional investments you are considering are appropriate for your time horizon and risk tolerance. Many of these investments are less liquid, so determining the time horizon of that portion of your wealth is critical.
  • Give you access to elite alternatives managers with proven track records, stability, a replicable process and transparency.
  • Seek to optimize all your holdings so that your mix of traditional and non-traditional investments is tailored to meet your objectives with the lowest long term volatility possible.